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Tape Transcript by JANE TEMPLE
MONEY BOX
Presenter: Paul Lewis
TRANSMISSION 7 FEB 2004 1200-1230 BBC RADIO 4
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ANNOUNCER: Now it’s four minutes past twelve and time for
MONEY BOX with Paul Lewis:
LEWIS: Hello. In today’s programme mortgage costs go
up swiftly after the Bank of England raises interest rates to 4%. One
building society boss may not offer the new child trust fund if he’s
forced to invest children’s money in shares. Jessica Dunbar’s with me
today:
DUNBAR: Reporting on a new company promising to get
back all the commission you pay on financial products.
MAN: According to this calculator I could potentially
save myself tens of thousands of pounds. I was very surprised to find
this out and intrigued to find out more.
LEWIS: 100,000 customers of Alba Life are told no more
annual rises on your investments and the former boss of Equitable Life
accuses the government of a cynical, political manoeuvre by bringing in
the serious fraud office. On Thursday the Bank of England put up
interest rates by a quarter point to 4% - it’s the second rise in three
months and was widely predicted by economists and commentators.
Within minutes of the announcement some lenders said they’d put up
mortgage rates by the full quarter point but very few have said anything
yet about raising the interest paid on our savings. We look at the
implications for saving and borrowing in a moment but first Rosemary
Radcliffe is with me. She’s of course the economist and advisor to
PriceWaterhouseCoopers. Rosemary, was the bank right to raise rates?
RADCLIFFE: Well as you know the bank is charged with
making sure we meet the inflation target and although inflation at the
moment looks okay, the bank’s getting worried about future inflation.
And I think they’re probably right to be a bit worried because the UK
economy was performing pretty strongly in the latter part of last year
and it looks as if that’s maintained into this year so the bank feels that
we need to just slow down a bit on the consumption side and that
suggests an increase in interest rates.
LEWIS: So although inflation’s 1.3%, that’s on the new
measure, it’s very stable and below the 2% target, they’re looking
ahead, they’re thinking what’s going to be happening in a year or two?
RADCLIFFE: They’re looking ahead. They’re looking ahead
for the next 6, 12, 18 months and against that background they want to
make sure that there’s a bit of room for growth and investment, for
growth in exports and perhaps a little less room for growth in
consumption which has been what’s holding the UK economy up in the
past.
LEWIS: And would they have been concerned by house
prices, not in the new index of course but they’ve gone up 16% last year
according to Halifax?
RADCLIFFE: I’m sure they will have looked very carefully at
the housing market and the fact that it still seems to be if not roaring
away at least developing pretty strongly and they’ve also of course been
looking at consumer debt levels.
LEWIS: Yes indeed. And I said earlier this week the rise
was widely predicted Rosemary, it’s worth saying by you on Monday
Box last September when you said we’d see rate rises as we move into
2004. You can’t get much better than that and I’m going to ask you
now to put your head on the block, what can we expect to see now?
RADCLIFFE: Well I think it’s clear that the bank has embarked
on a little and often strategy and I think that’s sensible too because
nobody knows for sure precisely how rapidly the markets are going to
respond to quarter percent rises so I think on the balance of
probabilities we should be talking about perhaps 4.5/4.75 by the end of
the year, maybe 5 as we go into 2005. But it will depend on what
happens generally with the economy, what happens in the budget next
month – all of that will be being looked at very carefully by the bank in
deciding the timing and the amount of the next rate increase.
LEWIS: And in a word, when do you expect the next one?
RADCLIFFE: I think it’s going to depend to some extent on the
budget and what Gordon Brown decides to do and maybe we can be
having a chat about that later in March but assuming that he doesn’t go
for big tax rises then I think it could be May, June when we see the next
little one – another quarter point.
LEWIS: Rosemary Radcliffe, thanks very much. Well
also with me is mortgage specialist David Bitner from the Market
Place. David, as I said all lenders were very swift to put up mortgage
rates by the full quarter percent. What are the sort of rates now? Who
did that?
BITNER: Well some of the big guns were very quick to
come off the blocks this time around- Abbey National, Woolwich,
Nationwide, Northern Rock – were all big names to immediately
implement a quarter point rise to their borrowers. Interestingly, most of
these passed on the full quarter point as well when we had the rate rise
back in November. When rates were falling from the 4% level down to
3.5 they only cut by about a quarter even though rates were cut by about
a half so they’ve widened their margins here considerably.
LEWIS: Is that damping down the housing market?
BITNER: It is going to have an effect. I mean after all
what the Chancellor’s trying to do or the Bank of England’s trying to do
is put up the cost of borrowing and what the mortgage lenders are doing
is actually giving them a helping hand here and they’re actually helping
him by increasing rates by more overall.
LEWIS: Yes, no-one’s terribly grateful I’m sure. 4% I
suppose interest rates are still pretty low aren’t they – what deals do you
recommend now? What should we be looking for if we’re
remortgaging or buying a property?
BITNER: Well the fixed rates available have actually been
costing in these rate rises for some time so they’re not offering great
value for money. Still the discount rates and the trackers are offering
cheaper rates but there is that cross over barrier that could come when
rates go up perhaps by another half a percent/three quarters percent by
the end of this year when it may have been better value to take a fixed.
LEWIS: So if you fix now you sort of lock in the rate now
that can avoid some of the rate rises that Rosemary Radcliffe told us
were coming?
BITNER: That’s right yes – I’ve got a couple of great
deals: one from the Coventry Building Society which has actually got a
capped rate at 5.5% but they track Bank of England base rate at .4%
over so that’s a great one for borrowers who perhaps don’t think rates
are going to rise too quickly in the long run.
LEWIS: David Bitner, thanks very much. Well listening
to all this in Bath is Susan Hannums. She’s savings manager at Chase
de Vere. Susan, lenders have been pretty swift to charge us more –
what’s happened to savings? Who’s done what?
HANNUMS: Very little movement so far but this is very
normal. It’ll be a couple of weeks yet before we know exactly what’s
happening and it’ll be at least the beginning of next month before the
majority actually do any movement.
LEWIS: Yes so we’ve not seen the sort of rapid increase
in our savings rates. Who has passed things on?
HANNUMS: Well there’s only a couple so far – we’ve got
Intelligent Finance and Tesco’s – they’ve moved by the full quarter of a
percent. We’ve got a couple of tracker accounts but again, that’s
normal. You’d expect the trackers to go immediately but as far as the
rest go it’s going to be a couple of weeks yet.
LEWIS: Yes I suppose with rate rises coming up in the
future – a tracker might seem quite a good idea cos at least you’re
guaranteed to get that increase aren’t you?
HANNUMS: Absolutely
LEWIS: What happened last time rates went up?
HANNUMS: Well last time I mean they’re not exactly eager to
increase rates and what we saw is a lot of providers announcing up to
the full quarter percent so there were a lot of savers that did lose out
LEWIS: So this year perhaps one for rate chasers – people
who move move their accounts to get the best rate, not the time to lock
into perhaps a slightly higher rate?
HANNUMS: No not necessary. I mean there’s all indications
that the fixed rates are creeping up slowly but surely so it might be wise
to sort of sit back a little.
LEWIS: Sit back on those and the best deals Susan
briefly?
HANNUMS: The best deal, one of my favourites is with ING
direct – that’s paying 4.22% gross. It’s easy access. There’s no sort of
hidden extras on that one so you can sort of fly in and if you find a great
deal out there fixed rate then you can lock into that then.
LEWIS: That’s ING Direct. Susan Hannums of Chase de
Vere thanks very much indeed. Now the government announced more
details this week of the new child trust fund. But almost at once one of
Britain’s biggest building societies warned it may not sell the tax free
accounts. They start in April 2005 for every child born from September
1st 2002. The government will put in £250 at birth, £500 for poorer
families and there’ll be a further payment at the age of 7. Although the
money can be invested in a savings account it’s emerged this week that
any company selling the fund will also have to provide at least one
version where all the money is invested on the stock market and that’s
left Coventry building society boss Martin Ritchley considering
whether he’ll sell child trust fund accounts at all:
RITCHLEY: If we’d been allowed to offer an entirely cash
based version we would be saying an enthusiastic yes. Now that
they’ve complicated it in this way I think we have some judgements to
make about whether the costs and the risks indeed can be justified. We
maybe putting people into equity based vehicles who shouldn’t be
there. This is a comparatively small sum of money at stake and the
government seems firmly of the view that in the long run equity runs
must bed better than cash vehicles. I believe that assumption may
prove to be flawed as we go forward.
LEWIS: Martin Ritchley of Coventry Building Society.
Well listening to that in Sheffield is Julian Crooks, he’s the principle of
the financial planning service and specialises in investments for
children. Julian, is Martin Ritchley right to be worried about shares –
equities as he calls them – for children?
CROOKS: I don’t think he is Paul really. I mean as a chief
executive of a building society I can understand where he’s coming
from but we are talking about effectively 18 year long investments and
you’d have to be very unlucky for the stock market not to out perform
other assets over that particular period. I’m not saying it’s not
impossible, but you’d be very unlucky.
LEWIS: Yeah it has happened. I can see one or two
occasions when it might have happened but they were quite a long time
ago but of course we don’t know what’s going to happen in the future
and it is this question of risk isn’t it? Should parents be investing in
something when there is a risk that they will lose their children’s
money?
CROOKS: Well I mean the risk has to be put into
perspective. I mean I’m sure that you know they wouldn’t lose all the
money and you’ve also got this facility built into the child trust fund –
into the stakeholder account which allows for the investments to be
switched progressively from the age of 13 into saver investments. So
that really does help to balance that risk.
LEWIS: Yes, now the other thing of course that will eat
away at your money – the government announced the price cap –
providers couldn’t charge more than 1.5% a year – that’s up from the
1% that we expected at first. Providers have said 1% wasn’t enough –
can they make 1.5% a year off the fund work?
CROOKS: Well on the face of it it would seem to me that
the providers are looking at 50% more money for doing the same thing
so you’d say that that seems to be a lot better deal than they had
previously. I think the difficulty is in actually paying advisors to
actually promote and sell the child trust fund. I think it will still be very
very difficult on that type of charge.
LEWIS: So some of this annual fund will go to give
providers more incentive – more money for selling these products?
CROOKS: Yes, yes it will
LEWIS: And indeed I did some calculations that you
know they’ll get at least £100 over the lifetime of the fund even if
nothing happens and if parents contribute and the fund grows like the
Treasury expects providers could get £4,500 in fees. Now given that
every child will have one of these it could be big money?
CROOKS: It certainly could be big money and I don’t
dispute the fact that providers do stand to make a reasonable amount of
money but it will be over the very long term. And it will be interesting
to know just what sort of period a provider would have to hold a child
trust fund to actually break even on it.
LEWIS: Now there has been some hint this week from the
Treasury that all parents will be able to have one of these even if they
weren’t born after September 2002. They won’t get the government
payment but they could have a tax free account. Would that be a good
deal for parents?
RITCHLEY: I think it’s absolutely essential – I really do
because I mean the title of the very first consultation paper which talked
about the child trust fund was called Savings and Assets for All. It
didn’t really specify that it would be for children born after a certain
date and speaking as a parent you do know that you do want to treat
your children equally.
LEWIS: That’s a very good point Julian. Thanks yes, and
just to be clear what the government said in the committee – the
Treasury Secretary Ruth Kelly said she was prepared to explore that
option. Any news on that of course we’ll bring it to you. But thanks to
Julian Crooks from the Financial Planning Service. Now we talked
about commission – do you know how much commission your
financial advisor does earn from your investments? Few of us do. This
week Jessica Dunbar’s been investigating a new company that promises
to track down all the commission you’re charged on all your financial
products and give it back to you.
DUNBAR: Independent financial advisors normally earn
their money from commission on the products they sell. One pension
provider told Money Box if you buy a stakeholder pension the advisor
will be paid a fifth of your first year’s contributions and get another
payment every year equal to 1% of all the money you pay in. This is
called renewal commission and over time it mounts up. But now a new
company is offering to refund this cash. For an annual fee of £35,
Intelligent Money will collect all the commission you pay on products
and give it back to you in one yearly sum. The company’s website lets
you work out how much this could be worth. Money Box listener Mike
Ryan was amazed by what he found out.
RYAN: According to this calculator I could potentially
save myself tens of thousands of pounds. I was very surprised to find
this out and intrigued to find out more.
DUNBAR: Mike has a personal pension plan which he
started when he was 18. He remembers paying some commission at
that time but hadn’t realised a percentage of his pension fund was still
being paid to his advisor every single year.
RYAN: I hadn’t really been aware of the on-going
commission. I took this pension out almost 20 years ago and I haven’t
seen the financial advisor since or heard from them. They may well
have told me at the time but it was so long ago. I’m very surprised to
find that someone is still making a reasonable amount of money every
year from a pension when I never get anything in return for that money.
DUNBAR: Intelligent Money’s chief executive, Julian
Penniston-Hill believes Mike’s experience is typical:
HILL: I believe the public have no real concept - and
this is because it’s been hidden from them - of the true cost of
commission both initial but more importantly the on-going renewal
commission which is far more draining. We want to educate the public
to the true cost of it- use the calculators on our website, find out how
much you’re paying, then make the decision. If you want to carry on
paying commission that’s your choice.
DUNBAR: And even if you bought your product direct from
the company it will simply keep the renewal commission itself.
Intelligent Money says it can get that back too. However, financial
advisors point out that signing up for this service means signing away
financial advice. Nick Bamford is chairman of the Society of Financial
Advisors representing 10,000 members:
BAMFORD: If you’re looking to your advisor to give you on-
going service, to communicate with you on a regular basis, to review
the plans that you have with him or her then you should recognise that
if you register with this service you may have stopped paying for the
very service you’re looking for. If we accept, and I hope people do, that
advice has to be paid for, there’s no such thing as free advice, then part
of the payment for that on-going advice is indeed the renewal
commission system.
DUNBAR: But Nick Bamford says customers like Mike who
feel their advisors don’t earn this renewal commission could benefit
from a company like Intelligent Money:
BAMFORD: The clever consumer could use this to their
advantage - if they don’t feel that they’re getting a good service from
their IFA and their IFA is receiving renewal commission I think they
could use this as a bargaining tool and simply say you know unless the
IFA bucks up his or her ideas up that they will go away and register
with this new service.
DUNBAR: If you decide to register one thing that’s not clear
is whether you’ll have to pay any tax on the returned commission. It
may depend on the type of products you have and some financial
advisors have told Money Box they doubt Intelligent Money can deliver
the service it promises for the fee it’s charging. But Julian Penniston-
Hill is adamant the business will work:
HILL: I’m supremely confident we’ll be around in five
year’s time. I’ve set the company up with the infrastructure and
framework to be able to trade at £35 per client, per year and give back
what we promised regardless of any external circumstances. So I will
guarantee we will be around to continue to fulfil our pledge.
DUNBAR: A very confident Julian Penniston-Hill but
remember this company is new and untested so think carefully before
you get involved.
LEWIS: Well thanks Jess. That certainly raises interesting
issues about the cost of financial services. So if you have a comment
about commission rates on financial products you can have your say
about it on our website – www.bbc.co.uk/moneybox. The insurance
company Alba Life has told its 100,000 customers that in future no
more money would be added to their savings. No annual bonus will be
paid and there’ll be no final bonus when the policy comes to an end.
Money Box reported in July that Alba’s owner, Britannic Assurance
was considering its future. Britannic told us then it was not abandoning
Alba but that’s not how it looks to many Alba customers who’ve
contacted us. Money Box listener Martyn lives in Guernsey. For 18
years he’s been paying into two Alba endowments expecting them to
repay his mortgage and provide extra cash for his retirement.
MARTYN: I just feel that I’m paying them premiums of just
over £100 a month, I’m going to be doing that for the next seven years
and I’m going to get no return on that investment at all. For all I know
I’m throwing £100 down the drain every month into a company that’s
going down the tubes.
LEWIS: When Martyn took out his endowments he was
told they should return more than £50,000 but after the announcement
he worked out he’ll get around £30,000 when his endowments mature
in 2011. That’s just about what he’d have paid in premiums over 25
years. I asked Paul Thompson, the chief executive of Britannic why
people like Martyn should continue paying in?
THOMPSON: Policyholders do need to continue to pay their
premiums in order to receive their guaranteed benefits that we are
offering at the moment and those benefits are very secure.
Policyholders who choose not to continue paying premiums would
unfortunately surrender their policies and not receive those guaranteed
benefits.
LEWIS: I understand that but the point is the money in
there and the money he’s now paying in will in itself earn nothing?
THOMPSON: Well no actually it will earn a positive return
LEWIS: But you say you’ll be paying no bonuses – you’ll
be paying no annual bonuses and no final bonus?
THOMPSON: Yes, but all of the premiums are invested in high
quality, fixed interest securities that do generate the return in order to
provide those guaranteed benefits. The ability to get a policy with the
same level of guaranteed benefits that we’re offering as well as
opportunity for growth is nigh impossible.
LEWIS; We’ve certainly seen guarantees that indicate that
and done the arithmetic that it indicates that you will only get back
roughly speaking what you’ve put in?
THOMPSON: But during the period they also have life cover
which is very valuable as well.
LEWIS: Right so really they’re paying out all this money
to get their money back and some life cover?
THOMPSON: They’re getting life cover and a return on their
proceeds which is similar to the bond rate.
LEWIS: After all this how can policyholders be sure that
those guarantees will be paid?
THOMPSON: I’m very comfortable that they can meet their
guaranteed benefits.
LEWIS: So Britannic is guaranteeing that Alba will not go
out of business – that it will meet these promises?
THOMPSON: That’s right – Britannic Assurance is standing
behind the guaranteed benefits of Alba Life with the proviso of course
that Britannic Assurance always has to continue to meet its minimum
capital requirements but its financial position is significantly above
those.
LEWIS: Paul Thompson confirming that if you carry on
paying into your Alba endowment policy you only get the guaranteed
amounts on maturity that appeared on your most recent statement. Well
Mark Meldon is an independent financial advisor with RC Grey & Co.
in Somerset. He says all Alba policyholders need to do their sums:
MELDON: You can undertake a very simple calculation by
adding up all the future premiums due and compare that with the figure
that is guaranteed to be produced when the policy matures. If the figure
is greater than it maybe worth continuing the policy – if the figure is
less then it maybe worth discontinuing the policy. In many cases you
can also make the policy what’s called paid up – i.e. not have to pay
anymore premiums but leave it in force for reduced benefits which will
be paid on maturity. It’s important that each individual takes some
action because in my experience the majority of people would probably
be best advised to pull the plug.
LEWIS; Of course if you do cash in the policy early
you’ll lose the life insurance which comes with it so make sure you
replace that. But Mark had different advice for people with Alba
pension policies. They may have guarantees that are too valuable to
lose:
MELDON: Part of the company used to be called Britannia
Life and they were very involved in a particular part of the pensions
market. They put in very high guaranteed annuity rates so it’s very
important those guarantees are looked at before taking any action with
Alba pension policies. We had a case locally where the conversion rate
of the fund into income was nearly 15% - at least double what you
could get on the open market today.
LEWIS: Mark Meldon and if you’re worried about an
endowment which is supposed to repay a mortgage with Alba or indeed
anyone else you can call our phone-in MONEY BOX LIVE on
Monday when I’ll be taking your questions on endowments. The
former boss of Equitable Life has made strong criticisms of the
government this week. In a wide raging BBC interview Chris Headdon,
who ran the company in early 2001 and was a director for many years
before that, defended Equitable’s record. And he went on to accuse the
government of a “cynical, political manoeuvre” after the Treasury
passed a report into the troubles at Equitable to the Serious Fraud
Office. The report by Lord Penrose won’t be published until later this
month but two week’s ago Treasury Minister Ruth Kelly told MPs a
copy had been delivered to the Fraud Office so it could “consider a
number of issues”. Chris Headdon reacted strongly:
HEADDON: I’m actually quite angry about it for two reasons;
the first is that I think as some journalists have speculated this is a
somewhat cynical, political manoeuvre by the Treasury and the end
result is that our reputation’s get smeared because there’s left a
lingering doubt that there was something fraudulent going on – it’s just
the SFO can’t find enough evidence or don’t think it’s worth taking on
and I think that’s unfair. The current board have had a very
experienced and not to say aggressive litigation firm looking at that at
least for the last two years. They’ve consistently said that they’ve seen
no evidence whatsoever of fraud and they accepted from the outset that
all the directors had acted honestly in what they had done. I also think
that using the Penrose results in this way is an act of bad faith – a
number of us participated very freely in that. We were told that Lord
Penrose’s brief was not to ascribe blame to people, that he was
inquiring into the facts not conducting a forensic examination of the
behaviour of particular individuals and we participated on that basis.
We’ve had really no opportunity to see what he’s concluded from what
we’ve told him so whether we believe that he’s interpreted what we’ve
told him accurately or not and then to find that the results have been
shipped of to the SFO to me feels like at a minimum an act of bad faith,
given the basis on which we were encouraged to participate with him.
LEWIS: Chris Headdon talking to the BBC World
Services – World Business Review. We did of course put his
accusations to the Treasury – a spokesman told us the government
would not comment before the Penrose report was published. And Jess,
new plans to tackle the problem of uninsured drivers which we
highlighted last week?
DUNBAR: Yes the Association of British Insurers has called
for much tougher penalties for drivers caught without insurance
including the confiscation of uninsured cars. The ABI reckons this
could save the insurance industry up to 500 million pounds a year
which could be passed on to honest motorists.
LEWIS: And new plans this week too to encourage more
people to save up for a pension?
DUNBAR: Yes, the government is considering making
people join a company scheme automatically unless they opt out.
LEWIS: And you can hear an interview on those pension
plans with the Secretary of State, Andrew Smith on our website. That
is though all we have time for today. You can find out more on our
website which is www.bbc.co.uk/moneybox where there are stories and
further information as well as details of how to contact the programme.
You can also listen to the programme or parts of it at anytime and don’t
forget to have your say on charges for financial services. Also
information with the BBC Action Line 0800 044 044 I’ll be back on
Monday with our phone-in looking at problems with mortgage
endowments and I’m back here next weekend with MONEY BOX as
usual. Today the reporter was Jessica Dunbar, the producer was
Jennifer Clarke and I’m Paul Lewis.